Tag Archives: royalties

Authors to DOJ: “Strong patent rights are vital to U.S. economic and security interests”

The United States Supreme Court and the Congress have moved to weaken patents over the past seven years without realizing the inherent danger to national interests.  

“Strong patents rights are vital to the economic and national security interests of this country,” say James Rill and David J. Teece in an article published last week, The DOJ must Exalt Intellectual Property Rights,” in RealClear Markets.

The article states that the U.S. Department of Justice must use its power to move intellectual property rights like patents into mainstream acceptability, and prevent them from being undermined “under the guise of anti-competitive behavior.”

Authors James Rill, Senior Counsel at Baker & Botts, served as Assistant Attorney General for Antitrust at the U.S. Department of Justice; David J. Teece is Professor in Global Business and director of the Tusher Center for the Management of Intellectual Capital at the Walter A. Haas School of Business UC Berkeley and a renowned economist.

“Assistant Attorney General Makan Delrahim’s recent policy statements and enforcement actions have re-asserted the historical value of intellectual property rights,” say Rill and Teece.

“He has suggested that the value of these rights have been inappropriately curtailed by the misapplication of antitrust principles, which could threaten the future of U.S. innovation efforts. As a result, AAG Delrahim has begun to restore the balance between antitrust and intellectual property rights, and has moved this important issue to the forefront of antitrust discourse.”

For the full article, go here.

Better Incentives Needed

Also published last week by Professor Teece in Competition Policy International, is a related in-depth article, “Enabling Technology, Social Returns to Innovation, and Antitrust: The Tragedy Of Depressed Royalties.” 

“Empirical studies show that almost all classes of R&D activity are under-supported,” argues Professor Teece. “Two in particular are grossly under-compensated: (a) basic research and (b) enabling (or general purpose) technologies… consideration needs to be given to amplifying, not diminishing, incentives for upstream investment in R&D. Such investment is perhaps among the most precious that society makes.”

Teece cites Nobel Laureate economist Douglass North on the impact of innovation incentives:

Throughout man’s past he has continually developed new techniques, but the pace has been slow and intermittent. The primary reason has been that the incentives for developing new techniques have occurred sporadically. Typically, innovations could be copied at no cost by others and without any reward to the inventor or innovator.

Recent efforts to enlist antitrust as a lever against patents, says Professor Teece, “have threatened to undermine incentives for R&D in several important areas.”

Subtle, theory-based antitrust arguments around patent “hold up” are a handy disguise for implementers and antitrust agencies to use to under-reward and thereby under-incentivize legitimate innovators.

Image source: cjnotebook.com; wsj.com

 

Royalty rates paid musicians decline for some streaming services

When it comes to getting paid, the bigger streaming service is not necessarily better for most musicians and song writers.

While the revenue and market share have grown for the leading streaming services, some significantly, the royalties paid to artists have been declining.

According to a recent article in The Trichordist, a publication dedicated to the protection of artists rights in the digital age, streaming royalties paid to artists declined in 2017.

The blog took snapshots from a major indie portfolio for 2017, 2016 and 2013. It found that “when streaming numbers grow, the per stream rate will drop.”

This data set is isolated to the calendar year 2016 and represents a label with an approximately 150 album catalog generating over 115 million streams, a fairly good sample size. All rates are gross before distribution fees.

Spotify was paying .00521 back in 2014, two years later the aggregate net average per play rate dropped to .00437 in 2016, a reduction of 16%, reports the Trichordist. The current effective per stream rate at Spotify has now dropped to 0.00397, a reduction of 9% since last year. This a cumulative reduction of 24% since 2014, which is an average decrease of 8% a year of the per stream rate.

Business Model Questions

“If the music business could set a per stream rate that allowed revenue growth, proportionate to consumption growth that would be a much better model,” said David Lowery, editor of The Trichordist and leader of the band Cracker and Camper Van Beethoven. Lowery teaches in the Music Business Certificate Program at Terry College of Business, University of Georgia.

A notable change from last year is that Pandora replaces YouTube with the greatest value gap of streams at 21.56% volume with only 7.86% of revenue. YouTube drops to 8.38% of volume with only 1.70% of revenue.

Indie Label Sample: 115 Million Streams

Top Players

Apple appears to be the lone streaming service that is growing both in market share and revenue, and is paying relatively high royalties. It accounts for 22.29% of the revenue on 10.48% of the streams, and pays approximately six-times the per-stream royalty rate of Pandora. (Apple’s iTunes is a direct purchase model, while Pandora offers a more radio-like format, which precludes on demand listener selection.)

More than 95% of the streams and 98% of the revenue were concentrated in the top ten companies. The top three, Spotify, Apple iTunes and Pandora, comprise about 80% of the streams for this representative catalogue and 82% of the total streaming revenue.

For The Trichordist‘s 2017 streaming sample, go here; 2016, here; and 2013 here.

Image source: thetrichordist.com

 

Copyright company filing is a “mini” IPO aimed at monetizing future music royalties

A business designed to acquire and monetize royalty streams “of the world’s biggest artists,” Royalty Flow, went public last week with a “mini” IPO, or registration under Regulation A+ crowdfunding initiative. 

A new type of PIPCO (public IP company), Royalty Flow hopes that under the 2012 JumpStart Our Business Start-up (JOBS) Act, passed by the Obama administration and known as “Regulation A+,” will enable it to raise between $11 million and $50 million. If successful, the capital will allow the company to purchase a portion of the income stream derived from Eminem’s 1999-2013 catalog and pay investors dividends in return.

Depending on how much money is raised, Royalty Flow will buy either 15 percent or 25 percent of an Eminem income stream based on royalties paid to FBT Productions, which often works with the performer.

With the recent upsurge in streaming revenues from services like Pandora, Spotify and Apple Music, some music industry observers believe that royalties generated under copyrights have a bright future. But streaming services have only just begun to pay recording artists and producers, and lucrative licensing deals reminiscent of returns on retail CDs are a long way off for most.  See “Music royalties – a siren song for niche investors seeking higher yield” in the August 23 IP CloseUp.

The Royalty Exchange website cites a Goldman Sachs analyst that paid streaming revenues will grow by 833% by 2030 (see graph above).

Reminiscent of “Bowie” Bonds

The Royalty Flow business model is reminiscent of the “Bowie” Bonds securitization that took place in 1997. In that arrangement Bowie’s company, the copyright holder, did not sell the assets, but a portion of the cash flow they generated over a ten-year term. Bowie did well on the $55 million deal. Investors, depending on when they bought and sold, did not.

“What Bowie sold was the present value of his personal intellectual property (song copyrights) – that is, the future expectation of future royalty income, less a discount,” said an analyst.

Those buying shares in Royalty Flow would have the right to collect dividends based on the performance of the Eminem catalog and any other catalogs acquired over time. The company says it intends to later list directly to the NASDAQ.

“The plan is to give fans and investors a way to share in the income from the royalties through dividends paid by the company,” reports Billboard.

The minimum investment during the IPO is $2,250 for 300 shares (at $7.50 a share). After the equity campaign is over, Royalty Flow “intends to list directly to NASDAQ and give latecomers a chance to invest in Royalty Flow stock through the public exchange.”

Royalty Flow was officially launched on November 27, 2017. The company, a subsidiary of Royalty Exchange, a copyright auction company. For more information about Royalty Flow, go here

For the Regulation A+ S.E.C. filing, go here.

Image source: royaltyflow.com

 

 

 

 

Music royalties – a siren song for niche investors seeking higher yield

A small but growing number of investors are buying the rights to musician’s future earnings, hoping to beat the fixed income returns and other markets.

According to an article in the Wall Street Journal, “Music Royalties Strike a Chord, these fixed income investors are lured by future returns of 8%-12% annually, when junk bonds are still hovering around 6%.

Private equity funds have raise or begun to raise $1 billion since 2013 when this sector appeared to be an alternative to low yields on fixed income.

There are a several types of royalties that can be sold, either for a specified period of time or until they expire. (For works created on or after January 1, 1978, it is life plus 70 years or 95 or 120 years, depending on the nature of authorship.)

David Bowie infamously sold his future copyright earnings for $55 million (“Bowie” Bonds), only to have new technology like Napster devalue them. [See, “The Bonds that Fell to Earth,” in the January 15, 2016 IP CloseUp.) The financing did wonders for Bowie balance sheet, although not all investors made out so well.

High Yield

Bowie Bonds paid 7.9% for ten years, at which time, I believe, they reverted back to the mercurial artist. He never lost ownership of all of his songs; he merely licensed the future earnings to some of them for a period of time.

Songs can also earn money when they are performed live, played in a restaurant or film, or streamed through a service like Spotify. They still do not make money from radio airplay (a legacy from old tech, when it was about selling records). Songwriters, music publishers, artists and labels own various rights, including performance rights.

WSJ reports that in the 2Q Denver-based website Royalty Exchange held music rights auctions valued at $2.5M, more than double the total from the 4Q 2016.  Royalty Exchange publishes a guide to music royalties, here.  It is a transaction site, so it is best to speak to a lawyer or experienced IP broker before buying.

Risk to music royalty streams includes timing, trends and technological threats. A song that generates a steady stream of income today is not necessarily going to in five or fifteen years. On the other hand, a small handful could actually generate more revenue than expected. Receivables, or royalty stream financing, takes place in many industries, including energy, real estate and sports.

Streaming Rises

The renewed interest in music royalties may due in part to increased royalty payments by services like Spotify, Pandora and Apple, which, similar to YouTube, have been notoriously reluctant to pay creatives fairly for content. But increases have been negligible for most performers and song writers, and top recording artists with leverage tend to cut their own distribution deals.

With disdain for IP rights on the rise, it is somewhat encouraging that niche investors still believe in the integrity of copyrights and the reliability of their income stream. For them to succeed they will need cooperation from streaming services, as well as songwriters and performers.

Image source: myradio360.com; entertainment.howstuffworks.com 

 

The bonds that fell to earth – The financial magic of David Bowie

The passing of David Bowie is a reminder that he was an innovator in finance and intellectual property, as well as music and fashion. 

Much has been written about the passing of David Bowie in New York at 69. It’s important to remember that he was a pioneer in music royalty securitization in 1997 with so-called”Bowie Bonds.”

00DavidBowieEsquireRussia1The bonds were a smart move for Bowie, who raised $55 million without giving up ownership of his prized catalog. He had gambled wisely on the future, and while the bonds traded poorly for investors —  a reflection of weakening demand in the music industry at the time — they never defaulted, paying holders in full at ten-year maturity.

First Mover

Bowie was a first mover, parlaying the future cash flow from his copyrighted song catalogue into an early payday just when the music industry was changing. The idea of royalty securitization remains viable today, if somewhat more sobering. As long as the financial modeling is right, and the appetite for risk sufficient, leading artists and innovators will continue to score with royalty deals.

In my 2001 book, From Ideas to Assets, Doug Elliott writes, “What Bowie sold was the present value of his personal intellectual property (song copyrights) – that is, the future expectation of future royalty income, less a discount (p. 462).”

“From 1991 to 1998 nearly $3.5 billion in Bowie-like royalty instruments were sold by other musicians (Rod Stewart), media conglomerates (Disney, Dreamworks, Universal), and branded marketers (Calvin Klein, Borden and GE Capital).”

The cash flows that comprised these securitizations were on a a whole far more reliable than the infamous mortgage-backed issues and CDOs that blew-up en masse and facilitated the 2008 bank melt-down. (See The Big Short, both the book and movie.)

Bowie told The New York Times in 2002 interview that copyright would no longer be viable in ten years and that music was likely to become a commodity “like running water or electricity.” He was not far off.

For a good Bloomberg story about Bowie’s foray into finance, go here. For the Wall Street Journal piece, go here.

Image source: gossipblog.it; vam.ac.uk

“Happy Birthday” is an orphan copyright, not yet public domain

U.S. District Judge George H. King’s ruling earlier this week means that “Happy Birthday to You” is now what’s known as an “orphan work” — a copyrighted work that’s so old that nobody knows who to pay in order to use it legally.

It is not necessarily in the public domain but may be by default.

As expertly reported in Law 360, nobody is sure who, if anyone, owns “Happy Birthday” if Warner Music doesn’t. Did the Hills [original owners] have heirs who could claim ownership? Did they have business partners who could have passed rights along?

“The ruling highlights a current issue that many in the copyright field complain about,” attorney Naomi Jane Gray said. “Copyright now lasts so long that it can be very difficult to find the author in order to even try to ask them for permission to legitimately use their work.”

$2 Million in Annual Royalties

“While it might come as a surprise to most that anybody claimed to ‘own’ the ubiquitous birthday song,” reported Law 360, “Warner/Chappell had for years been quietly doing just that, raking in an estimated $2 million a year in licensing fees from filmmakers and C9E3AA0F864-184002687952B1A0FF62741others.

“Warner/Chappell, the publishing unit of Warner Music Group, long claimed that it had inherited a 1935 copyright for the song from a company it purchased in 1988, but a group of filmmakers and artists who paid those licensing fees challenged that claim in court in 2013. They said they’d found new documentary evidence that cast doubt on Warner’s claim and that they wanted their money back.

“On Tuesday, they won big. A California federal judge ruled that Warner’s predecessor company — Summy Co., which purportedly acquired the rights from the song’s original authors — had only acquired the rights to the song’s melody, which had long since passed into the public domain.”

As for the lyrics? There was no proof that Summy had ever actually acquired them, meaning Warner never owned them either.

For the full analysis go here.

Image source: http://www.ohmygoodness.com


%d bloggers like this: